VAT reform in the EU

The European Commission launched plans on 4 October 2017 for the biggest reform of EU VAT rules in a quarter of a century.

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Why does the EU's VAT system need reform?

The current VAT rules for cross-border trade between businesses in EU
Member States date back to 1993, just after the creation of the Single
Market. At the time, they were meant to be transitional. The rules do
not take into account technological developments, changes in business
models or the globalisation of the economy, making them outdated.
Crucially, the current VAT regime exposes EU countries to an
unacceptable and damaging level of VAT fraud. Revenue losses from this
type of fraud are estimated at around €50 billion annually in the
EU.Money which could have been used to build schools, roads and
hospitals is instead spirited away by criminals to finance organised
crime, and possibly terrorist organisations. Member States recently
identified VAT fraud as one of their top ten priorities when it comes to the fight against organised and serious international crime (see separate section on fraud).

The VAT reform proposed today would make the system more robust,
simpler and fraud resilient, a system based on increased trust and
cooperation between tax administrations. The Commission wants a VAT
system that helps European companies to compete in global markets.
Compliance costs for all businesses should also be reduced by
simplifying and modernising the VAT obligations and VAT collection
process.

A definitive VAT system for the EU has been a long-standing commitment of the European Commission. Recently, the Commission's VAT Action Plan
explained in detail the need to come to a EU single European VAT area
that is simpler and fraud-proof. The rules also need to be rebooted so
that businesses can reap all the benefits of the Single Market.

What is the Commission proposing today?

The Commission is today proposing a series of fundamental principles
and key reforms for the EU's VAT area which will improve and modernise
the system for governments and businesses alike. Once agreed, these
principles or 'cornerstones' will form the backbone of a robust EU-wide
system which can keep pace with today's digital and mobile economy. The
new system would also be much more fraud-proof.

The cornerstones which will be sent to Member States for agreement include:

Tackling fraud: VAT should be charged on
cross-border trade between businesses inside the EU. Currently, this
type of trade is exempt from VAT, providing an easy loophole for
unscrupulous companies to collect VAT and then vanish without remitting
the money to the government.

One Stop Shop: It will be simpler for companies
that sell cross-border to deal with their VAT obligations thanks to a
'One Stop Shop'. Traders will be able to make declarations and payments
using a single online portal in their own language and according to the
same rules and administrative templates as in their home country. Member
States will then pay the VAT to each other directly, as is already the
case for all sales of e-services.

Greater consistency: A move to the principle of
'destination' whereby the final amount of VAT is always paid to the
Member State of the final consumer and charged at the rate of that
Member State. This has been a long-standing commitment of the European
Commission, supported by Member States and the European Parliament. It
is already in place for sales of e-services.

Less red tape: Simplification of invoicing rules,
allowing sellers to prepare invoices according to the rules of their own
country even when trading across borders. Companies will no longer have
to prepare a list of cross-border transactions for their tax authority
(the so-called "recapitulative statement").

Today's proposal also introduces the notion of a Certified Taxable
Person – a category of trusted business who will benefit from much
simpler and time-saving rules.

THE DEFINITIVE VAT REGIME

What is the biggest change?

VAT is a tax levied on most goods, products and services available
for purchase in the EU. In principle, everything we buy includes VAT in
the price. When selling domestically (i.e. not across borders) companies
also pay VAT on the goods that they buy and which they plan to sell on
to another business or to consumers. VAT is not currently charged on
sales between businesses in different EU Member States.

Today's proposal envisages a future VAT system where VAT will be
charged on sales that are made across borders to another country in the
EU. The rate applicable in the country of destination will be charged.

The VAT on cross-border sales would be collected by the tax authority
of the originating country and transferred to the country where the
goods or services are ultimately consumed. In order to allow a soft
transition for tax administrations and businesses, the first step of the
definitive VAT system will focus only on transactions in goods.

How does the 'One Stop Shop' portal work?

Businesses that trade within the EU will be able to sort out their
VAT far more simply and easily, via an online web portal (or 'One Stop
Shop') in their home country. Otherwise, traders would have to register
for VAT, file returns and make payments in every EU country where they
operate. The online portal would also allow VAT to be collected by the
country where the sale is made and transferred to the country where the
goods are consumed. A similar system is already in place and working
well for sales of cross-border e-services. The Commission proposal to extend this system to online sales of tangible goods is currently being discussed by Member States in the Council.

In order to allow for a gradual transition, trustworthy businesses
('certified taxable persons') that are certified by their tax
administrations, including SMEs, could continue to purchase goods free
of VAT in another Member State and pay VAT in their own country.

What will this mean for companies?

The rules will become more simple and harmonised across the EU, which
in turn, will make it easier for companies to do business across
borders.For example, businesses will be able to make their declarations
and payments for cross-border VAT via one online portal and in their own
language ('One Stop Shop'). This will lighten the administrative burden
and save time and money. Those companies that fulfil certain criteria
will be considered eligible to become a Certified Taxable Person, which
will bring further benefits (see below).

What will this mean for national tax authorities?

Member States' governments will be able to collect billions in VAT
revenues which would otherwise be lost. In addition, the rules will be
made simpler for everyone, which means there will be easier and more
harmonised procedures and less administrative burden for the
authorities. The definitive regime will put in place the self-policing
function of the VAT system at EU level, making VAT auditing and
collection easier for tax administrations.

What will this mean for consumers?

The new proposal only applies to transactions between businesses
(B2B), so EU consumers will not be directly affected. However, solving
the problem of tax fraud is beneficial for society as a whole. The vast
sums of money which are lost now because of fraud could be better
invested in public projects and services such as schools, hospitals and
roads. In addition, cutting back on tax fraud will close down a cash cow
for criminal organisations and possibly even terrorist groups.

Finally, by removing obstacles to selling goods and services across
borders, the definitive regime can boost competition between firms from
different countries, resulting in lower prices for the consumers.

What is a 'Certified Taxable Person'?

The concept of a Certified Taxable Person is a new initiative being
proposed today to facilitate trade and make life easier for companies
operating cross-border in the EU. Provided that companies, small or big,
meet a set of criteria, they can get a certificate allowing them to be
considered throughout the EU to be a reliable VAT taxpayer. A business
can become a Certified Taxable Person by applying to their national tax
authorities and proving compliance with a set of sufficiently harmonised
and standardised pre-defined criteria including: regular payment of
taxes, reliable internal control systems and proof of solvency.

Once certified, both they and the companies that do business with
them will enjoy a number of simplified procedures for the declaration
and payment of cross-border VAT. The status of Certified Taxable Person
will be mutually recognised by all EU Member States.

VAT FRAUD

Who commits VAT fraud?

VAT fraud is a major EU-wide problem. It is carried out by criminals
and organised crime networks. VAT fraud can occur in many sectors
including electronics, cars and carbon permits.

While VAT carousel fraud is set up by individuals sometimes involved
in other criminal activities, fraudulent VAT schemes generate financial
profits which are then subject to money laundering in the same way as
profits from other criminal activities.

Which products or sectors are most prone to VAT fraud?

The most attractive goods for fraudsters have been those of high
value and low volume such as mobile phones or computer chips, which
generate huge amounts of VAT in the lowest number of transactions and in
the shortest possible time.

In recent years, by taking advantage of the shortcomings inherent in
the current VAT regime, VAT carousel fraud has rapidly moved from one
product or economic sector to another with criminals quickly adapting to
any counter actions taken by enforcement bodies.

VAT fraud also tends to move from traditional to new sectors where
buying and selling can happen extremely quickly due to the intangible
nature of the products. For example, pollution rights exchanged on the
carbon-trading market have given rise to huge fraudulent schemes in the
past years. One of these networks was dismantled in France between 2008
and 2009 and amounted to a loss of more than €1.6 billion for the French
budget.

It is also now possible for VAT fraud to take place without any
tangible goods being moved at all: carousel fraud circuits have recently
moved from real economic flows to entirely virtual operations supported
by fake invoices.

What are the links between VAT fraud and organised crime, including terrorism?

Several cases of VAT fraud investigated in recent years have
repeatedly highlighted the link between VAT carousel fraud and money
laundering:

A 2015 case involved the dismantling of an organised crime network operating in Czech Republic, Netherlands, Germany and Poland.

In addition, investigations are ongoing at Member States level which
could potentially reveal links to the financing of terrorist activities.

A recent study
by the European Parliament's PANA Committee revealed that, according to
EUROPOL, 388 out of the 3,469 entries appearing in the so-called Panama
papers were connected to VAT fraud operations. Fighting large-scale VAT
fraud implies tackling the money laundering processes of fraudsters as
well.

According to another EU study,
21 cases of EU VAT fraud between 2004 and 2010 involved organised
crime, with the proceeds potentially being used to finance other types
of crime, such as drug trafficking, trafficking in human beings,
identity fraud, alcohol smuggling and counterfeiting.

What is missing trader fraud (MTIC) and VAT carousel fraud?

VAT fraud can occur when a company that has collected VAT from its
buyer and should pay this amount to the tax authority does not pay but
instead disappears. The business owner simply vanishes with the money.
Most fraud takes place when the company buys goods from another Member
State, because purchasing the goods is VAT-free. When selling the goods
on domestically, the company receives the entire amount of VAT, which it
pockets. Because the company disappears, this type of fraud is called
missing trader fraud.

Carousel fraud goes even further. In this case the same goods are
bought and resold by the fraudster several times via middlemen. Each
time the amount of collected VAT increases and the company either
disappears or becomes insolvent before the tax authority can collect the
accumulated VAT. With carousel fraud, the same product goes around
several times before the fraudsters disappear.

Why are the current rules prone to fraud?

The nature of VAT collection, whereby the money is collected
step-by-step all along the production chain, helps incentivise companies
to follow closely their VAT obligations. In this way, they can claim
back the VAT they pay when buying and the full amount of VAT is finally
paid only by the final consumer. But goods sold across borders in the EU
are today exempt from VAT. At the same time, the company buying the
goods must charge VAT when selling on to another business or to a final
consumer in the same Member State. This gives unscrupulous businesses
the opportunity to simply pocket the full amount of VAT and disappear.
There are no adequate cross-border control systems that can operate
quickly enough and this problem forms the root of a significant amount
of fraud. For example, significant MTIC fraud or carousel fraud can
occur within a single month, which is too short for the tax authority to
detect the fraud and to react.

How will the switch to a definitive VAT regime help to fight VAT fraud in the EU?

The proposed cornerstones of a definitive regime scrap the exemption
of VAT that is currently in place for cross-border trade within the EU,
which is the main case of large-scale, cross-border VAT fraud today. In
future, VAT should be collected and paid in the same way as for domestic
transactions. This would dramatically decrease the risk of non-payment
of VAT to governments and eliminate the main weakness of today's
cross-border VAT calculation (see diagram).

In short, the proposed rules would simplify the EU VAT area and make
it more difficult to commit fraud. A robust single European VAT area
would treat cross-border transactions in the same way as domestic
transactions (i.e. cross-border trade will no longer be exempt from
VAT), putting an end to the inbuilt weaknesses of the system.

SHORT-TERM 'QUICK FIXES'

Why is the Commission proposing 'Quick Fixes' to improve the VAT system?

The Commission is also proposing today a number of short-term
measures to improve the functioning of the VAT system until the
definitive regime has been fully agreed and implemented. These quick
fixes address issues explicitly requested by both businesses and Member
States, and cover:

Simplification of VAT rules for companies in one Member State storing
goods in another Member State to be sold directly to customers there.
This simplification is limited to Certified Taxable Persons who will no
longer need to register and pay VAT in another Member State when they
store goods there.

Simplification for those elements of a chain transaction which do not
involve the physical movement of goods, for example when goods are sold
via several traders, but physically the goods move directly from the
original seller to the final buyer. This simplification is limited to
Certified Taxable Persons.

New harmonised and uniform rules so that traders can more easily
provide proof that goods have been transported from one EU country to
another. This simplification is limited to Certified Taxable Persons.

Clarification that, in addition to proof of transport, the VAT number
of the commercial partners recorded in the electronic EU VAT-number
verification system (VIES) is required for the cross-border VAT
exemption to be applied under the current rules.

NEXT STEPS

What are the next steps for this proposal?

The proposal will be forwarded to the European Parliament for
consultation and to the Council of Ministers for their agreement. It
will require unanimous agreement from all Member States in the Council
before it can enter into force.

A second directive overhauling the whole VAT Directive will be
proposed in which the cornerstones will be implemented and the current
transitional articles will be replaced or deleted.

Further changes regarding the administrative cooperation rules and
substantial IT developments will be needed in order to ensure the proper
operation of the system.

The adoption of this second proposal is currently scheduled for 2018
and the definitive regime should enter into application in 2022.

Will these new rules affect trade with suppliers outside of the EU?

No, the new proposal only applies to commercial transactions within the EU.

Who has been consulted ahead of this proposal and what was the outcome?

Throughout the process of drafting the proposals, interest groups and
stakeholders were consulted regularly through conferences, working
groups with representatives of Member States (Group on the Future of
VAT) and business (VAT Expert Group).

A public consultation also ran for three months until March 2017, resulting in 121 contributions.